The Mark Perlberg CPA Podcast
The Mark Perlberg CPA Podcast
Ep 87 - Understanding Your K-1 From Real Estate Investing w/ Kris Bennett
Ready to slash your tax bill? Schedule your free consultation and let's strategize your tax savings together! Book now at: https://www.prosperlcpa.com/apply Or, if you still need more time, here are some other ways to begin winning the tax game...
Take our free Tax Planning Checklist & learn about what tax savings may be available for you in our minicourse at https://taxplanningchecklist.com
At the very least, get on our newsletter to gain access to free live events and exclusive insight you won't find anywhere else: https://www.prosperlcpa.com/newsletter-subscription
Unlock the secrets to saving big on taxes for high earners—join our FREE live Tax Q&A calls Wednesdays at 3pm EST Reserve your spot now at: https://www.prosperlcpa.com/live-qa
Get your FREE Personalized Tax Planning Video at: https://www.prosperlcpa.com/5minutetaxplan
Make the most of the available tax strategies for real estate investors and gain access to reliable guidance, expense templates and workpapers with our Essential Tax Planning for Real Estate Investors Course
Listen to Kris Bennett and Mark Perlberg break down the complexities of K-1 partnership tax forms for real estate investors, highlighting how understanding these documents can lead to significant tax savings and strategic investment planning.
• K-1 forms show your share of income flowing from a partnership investment, appearing different from W-2 or 1099 income
• Understanding capital accounts is crucial - a negative capital account doesn't mean you've lost ownership in the investment
• Real estate professional status can allow investors to deduct rental losses against active income
• Cost segregation studies generate significant tax benefits but must be strategically timed
• Depreciation recapture and capital gains taxes significantly impact investment returns when properties are sold
• Partnership structures make 1031 exchanges challenging without advance planning
• State tax implications differ from federal treatment, requiring careful consideration
• Suspended passive losses can offset future capital gains from real estate sales
• K-1 delays are common due to the complex nature of partnership tax accounting
• Advanced tax planning becomes increasingly valuable as investment portfolios grow
Learn more about tax strategies at taxplanningchecklist.com or connect with Kris Bennett at storageinvestorshow.com to discuss storage and flex space investment opportunities.
Welcome everybody live and to the recording. I got Chris Bennett here. This is also going to be on the Mark Pearlberg CPA podcast and my YouTube page and, chris, if you want to use the audio, you're more than welcome to do it. Yes, please, absolutely Fantastic. So I'm Mark Pearlberg, cpa and tax strateg, helping high income earners and entrepreneurs minimize their taxes. And, chris, can you introduce yourself in 60 seconds or less?
Speaker 2:Absolutely so. I'm Chris Bennett, host of the Storage Investor Show. I've done self-storage investing now for a couple of years. I was with a previous firm as their managing partner over the self-storage division. I co-led that division. We did about $120, $130 million in self-storage in a relatively short period of time and some expansions about 200,000 square feet of expansions. But yeah, I got my start in 2017 with a company called 10 Federal.
Speaker 2:If you've been around self-storage or have kind of looked at that asset class, some of the names out there are pretty familiar, so I've been around it for a little while, done some mom and pop deals, done some larger deals, so I love the space. Looking now actually at Small Bay Industrial, I think there's a really interesting story there with FlexSpace as well. So looking for those kinds of deals. I'm based in Charlotte, north Carolina. So if any of you guys are in the area any point in time, hit me up on LinkedIn or X or whatever. Happy to get together with you for a cup of coffee, talk about storage and just chat about what's going on in the investing space.
Speaker 1:What do you mean by flex space? You mean mixed use.
Speaker 2:Yeah, yeah. So you think about self-storage. You have a 10 by 10 garage roll-up door Flex space. Make that bigger, make it 1,000 square feet. So 10 by 10 is 100 square feet. Flex space might be a 1,000 square feet with a 16-foot roll-up door and maybe a small not small but like a regular size, like door that you would come in to the space. So not just the roll-up door but a door right next to it where you actually walk in, and within that space you might store, you know, lawnmowing equipment, you might store some sort of people store, like just like a boat or whatever a larger thing.
Speaker 2:Some people use it for their business, like a YouTube channel that I know of a guy who he does automotive videos, and so he uses that space for his channel. He has his desk and production stuff and he brings a car in there. He can control the atmosphere, the lighting and all that kind of stuff for his videos. So you have HVAC companies, you have other folks who need that space. Most of them would be people and companies we'd never heard of. But if you drive through any like industrial park, you will see names all over the place that you've never even heard of. But they do granite countertops, they do roofing, they do high end you know lawn maintenance and commercial lawn maintenance et cetera.
Speaker 2:So those kinds of places, um, as an example I don't want to take up too much time here on that, but as an example there's like small bay industrial, mid bay industrial and then large industrial which we think of like Amazon warehouses. The small bay is in really short supply in markets. So, for example, in Charlotte right now self-storage is a little bit overbuilt. You have a little bit too much supply. It's not being absorbed fast enough, so you're seeing a little bit of rent declines. And the complete opposite is true in the flex space world. You have about 11 counties around Charlotte. None of them have any new development in the pipeline, except for one county and that's it. Their occupancies are all around 98 ish percent. So you have a major imbalance of supply and demand.
Speaker 1:So that's what FlexSpace is Cool man, Awesome yeah.
Speaker 2:Well, let's get into the. I think somebody needs to mute themselves real quick. Here's the situation there, because I get some feedback.
Speaker 1:I got it.
Speaker 2:Got it Okay, I think I got it, here we go. There we go.
Speaker 1:Perfect Good morning here we go there, we go. Perfect, good morning, there we go. Okay, cool. So what we're going to dive into today is what the K-1 means and how to make sense of that K-1. And you know, I see a lot, even CPAs, making mistakes on this, and if you guys are, for instance, chris is always pulling together different investors and he has other investors in his projects and that's very common in larger investments here, where the investors and he included in this is going to get a K-1 for the partnership interest, and a lot of times they get it and they go well, this looks nice and they give it to their accountant, but they don't even know what it means.
Speaker 2:And how does?
Speaker 1:this and a lot of times. Not you, I'm not calling you up, but just in general. You know it's a complicated document and so our goal here is to help you guys make sense of this K-1 doc. What does it mean and what are the tax implications and planning opportunities and potential pitfalls as well?
Speaker 2:Yeah, can I let me ask a quick question. So I think of it this way. Somebody else asked me about the K1 the other day cause I told them we were doing this workshop and I told them I think of it like there's obviously different types of like income forms that you get, but I think of like W-2 income. You're working for a company, you're a full-time employee, you know, or maybe part-time, whatever, whatever that looks like, but you get W-2 income. That's the one that most people are familiar with.
Speaker 2:Then you have 1099 income. Well, that's like you're an independent contractor, maybe doing some freelance work, or a lot of real estate agents will get a 1099, you know, because you're just, you're just doing contractual work, you're not employed by the person giving you the money. And then you have K-1 income and that's your investment income and most people I think, before they start investing, they've never heard of a K-1 before. But is that kind of? I know there may be some other buckets, but that's kind of how I think of it, like the three main buckets whenever I talk to investors or people who are not familiar with it.
Speaker 1:Yeah. So what I would say, as the easiest way to explain this to someone receiving it, is that the K-1 is going to show your share of flow through income coming from a partnership or an S-corporation. But essentially you have a partnership return or an S-corp return, but we're focusing on partnerships today, although some of this will be relevant. The partnership determines the net income, revenue minus expenses, in the balance sheet and then it issues a K-1 that shows your share of the income that you that you own. So what is your share of the net income? The losses also, or if you could have ordinary income, show up in a K-1, if you participate in a partnership, you could have interest income, capital gains income. Whatever your share of stuff and activity is that's going to show up on the K-1.
Speaker 2:Okay, got it, so that makes sense. Yeah, yeah. Okay, that makes sense. It could be business, could be investment, could be whatever, but the point is it comes through that K1.
Speaker 1:Yeah, and now, unlike a C corporation, the partnership doesn't pay any taxes at all. It is just doing the activity and it creates income and the how much of it is taxed is determined at your individual level. So that's going to flow onto your 1040 and you're going to report your share of income or losses or different items and then, based on your individual circumstances, determines the tax implications of those activities.
Speaker 2:Okay, got it.
Speaker 1:And I'm sure you're aware, but just for the audience listening, we're going to start real simple, keep things as simple as we can, and for some of you who are like, yeah, duh, I know that thing in there, we'll dive into some more complexities and nuances in a little bit here. So you know, what is your experience? I'm curious, what has your experience been, you know, when you first get a K-1, or your investors get K-1s, and what has your experience been as far as receiving them, evaluating them and making sense of them? And then also, you know, fill me in on some questions you often get from investors and people you work with when they get the K-1s you often get from investors and people you work with when they get the K ones.
Speaker 2:Yeah, so when you first, when I first get it, uh, when I first got them, it was a bit confusing, like I understood where it was coming from and you know why. It said or actually have mine went from a previous deal. Uh, pulled up here on my left and you look at everything that comes in and you see, like a bunch of numbers, you obviously understand, okay, the deal itself and what you're getting, why you're getting it, uh and your partnership share, et cetera. But some of the other stuff like okay, uh, like in section L, the partner's capital account analysis, like the capital account itself, and you see, maybe it's going down or whatever. You don't fully understand, uh, what is happening there. Wait a second, my capital is being returned to me, like I thought it was just going to be. Stay in there.
Speaker 2:Sometimes they'll get confused between return on capital and return of capital.
Speaker 2:That's a big one, because they feel like if their capital count goes to zero, they no longer have ownership in the deal, which is obviously not true. And then just how the, which we can get into later on, but how the if you get a cost segregation study done, you know, and the depreciation that you get from that, how that flows through the K-1 as well, because there's sometimes minus signs, like net rental income is negative, and maybe you don't understand you know why that is or we've had investors obviously not understand why that is. So that's, that's some of them, and I think a bigger one too is at this time of year it's March 2025, people are getting K-1s, probably from some folks that they've invested with, but others are delayed and there's a big. You know why. The big question is always like why is it delayed? Like what's going on? I have to file an extension now and that's super irritating for a lot of investors. So I think that's probably the biggest question is why is my K1 delayed?
Speaker 1:Oh yeah, you know and you know, think about that is the partnership returns are the most. I mean sometimes you could do a simple one, but oftentimes partnership returns are the most complex returns possible. Partnership tax law can get highly complex here and you have these partnerships. Sometimes the structure can get a little bit more complex and the accounting firms rarely can meet that 315 deadline and that's just because the books oftentimes are going to take a while to close. It's a lot harder to issue closed books and just produce a W-2.
Speaker 1:That's kind of automated. So not only are they waiting on the books to close, they got to evaluate the books, make adjusting entries and crank out all these partnership returns. And then you get folks who are used to just plugging in their W-2, having their return done in April. They're like what's going on here and they don't realize all of the back work that goes to produce this K-1 that they need for the 1040. So for that reason we've been very, very careful in how many partnership returns we do and setting the expectations, because sometimes it's just literally impossible to get those returns out on time.
Speaker 2:Yeah, I think it's important to communicate that with investors, that if they're going to be late, you got to let them know as soon as possible. Sometimes they're going to be on time, of course, but or hopefully you can say, hey, we might be a bit late, and then, uh, come in a little bit earlier than you anticipated. That's always going to look better if you say, oh, yeah, we'll get them out to you on time and then you got to let them know later on that you're delayed, uh, for whatever reason. I think 21, 2021, 2022, I can't remember they were delayed until like October or September, really late in the year, and it's because the firm that we hired to do them at that time actually hadn't even started on them and had I don't want to say misled, but just whatever happened miscommunicated with us, and it was a major issue and it was somewhat embarrassing, obviously, for us as well, but it was a little bit outside of our control.
Speaker 2:We kept checking in, checking in what's going on, what's going on. Then come to find out they actually weren't as far along as they had led us to believe, which was, again, a possible miscommunication. The point is we were really late and people were really upset about that. So it's better to kind of try to head that off at the pass and be upfront about it if you can't be.
Speaker 1:Yeah, you know, we connected some of our clients to a group that had a partnership structure that gave a really good charitable deduction and invested in real estate. It was like a two and a half X charitable deduction and preferred returns and future cap gains. And a lot of these guys were not real estate investors or weren't real entrepreneurs, so they didn't know or understand all the nuances of getting K-1s and they're like, oh my God, it's April, what's going on?
Speaker 1:I'm like guys chill out Like this is normal. These K-1s are very complex, especially when you have nuances like that. So, yeah, so at least you know and else's practitioners, we have to set expectations and make sure we're fully. We always have to actually overstaff if we, if we have these high expectations. Now, some of the things I also think about here is when we have, when you get these K-1s and you give them to your account and we've seen this sometimes the accountant doesn't know a whole lot about real estate investing and they could make mistakes, so there could be errors and you want to at least understand. You could keep a tab of all the different income and expense items and make sure it's somewhat resembled. When you look at your return and your net income and your AGI, it somewhat resembles what you would expect as the collection of your W-2, k-1 income and losses, as you, if you expect them to impact your W-2, your 1040 and you know, start developing some sort of reasonable level of curiosity and understanding of what these forms should do on your 1040.
Speaker 2:Yeah, that's true, and I think also too, part of it is you know what the other question is, like what happens when we go to sell a property, which you know we could probably get into that a little bit later on, but that's a larger question too Like what happens if we sell it, you know, what happens to the depreciation that we experienced over the holding period, et cetera. That's that's a question that we've gotten in the past.
Speaker 1:So that's something we should probably try to answer for folks as well. Yeah, so some of the things that we should be thinking about here is we get a lot of. I'm going to pull up some. So these are some real K-1s that we've gotten from our clients and I'm going to tell you some of thes. These are some real K1s that we've gotten from our clients and I'm going to tell you some of the stories around these K1s. And also, Chris, I'm going to share with you as well I'm going to share the screen and I'm going to narrate this to the folks listening to the recording, and we're going to talk about what this stuff means and also tax traps and errors in reporting that could be dangerous.
Speaker 1:So let's get into it and we'll talk about. This is going to give you a good idea of pretty much like the lifestyle cycle of an investment as you see it through the K-1s, and I'm going to start off with a K-1 that a lot of people would like to see when they understand what it means here. So this right here is a K-1. And look at this number right here, line three what does that say?
Speaker 2:Negative 800. It's under other net rental income. It says negative $880,509. That's a lot.
Speaker 1:That's a nice tax deduction here. Now. Another thing you'll notice here is look at the year 2020. And in 2020, it was really easy to create real estate losses, 100% bonus depreciation, and we may go back to that amount Right now. It wouldn't be as easy to create such a large tax deduction here. Now, the reason why it's in other is it's this one. You invested in a collection of rentals, so they classify it as other. Usually, you're going to see in line two net rental real estate income. It's treated the same way here.
Speaker 2:That's what I was thinking, because I just looked at mine and it was showing in line two as negative on that one. So I'm glad you mentioned that.
Speaker 1:Yeah, absolutely. Some other things that are interesting here is you have tax-exempt income and non-deductible expenses. So we have non-deductible expenses of $24. That's just a meal, because you can only write half your meal, so they just add that back in there. Now here's something interesting that helps you understand what took place with this guy Right here. We see this item right here $500,000 of capital contributed during the year. That means that this guy invested a half a million dollars and he received a tax loss of $880,000. Loss of $880,000. So I love situations where your deduction is greater than your cost to create the tax deduction. So here is one of those examples and I mean I imagine you've seen similar things play out and I'm curious. Uh, you know what, what?
Speaker 2:Yeah, on this one. I'm curious on this one, was this guy a passive? Um, yeah, it says LP. He's a limited partner in this one. I'm just checking the, the check in the checkbox there. Okay.
Speaker 1:Yeah, Truly passive here. Okay, so absolutely no activity in the investment. Now I'll tell you about this guy because I know him and he's our client. He wasn't our client when he received this K-1. But the client had real estate professional tax status and he had a high income I think he was a physician and owned some other businesses close to a million in profit here and because he had real estate professional tax status, he now has a loss of $880,000 of where he can use that to offset his other income. Now he didn't materially participate in these activities and you can listen to my prior content on the real estate professional tax status. You need to have involvement in your real estate to have the ability to deduct it against your income. But he had other rentals that he and his wife self-managed and his wife had real estate professional tax status, so he was able to use all of this $880,000 loss to offset his income. Not bad right.
Speaker 2:Oh, that's excellent. Yeah, so I was going to actually ask about that. If he was a physician, then how did he have the real estate professional status? But you mentioned you have to have the hours, and then his wife did as well, so that helps a ton. So that makes sense.
Speaker 1:Yeah, Really really great opportunities here. Now one of the things we can also think about here now. This is really common. You have high income earners. The wife may not be able to work full time because maybe they're raising kids and they're looking for something to do to contribute. So a lot of times the wife will start taking over the real estate rentals, or the husband, and they get the real estate professional tax status and he can wipe out a good chunk of not all of the taxes from the active income of the other spouse, which is really cool.
Speaker 2:Yeah, okay, that makes sense. I'm curious. Can you scroll down just a little bit, cause it shows, I think, under his partnership percentages. Yep, why would it say? I'm just curious, is it because he's an LP that it says various, or is it? I'm just curious about that?
Speaker 1:That's a good question here and I probably picked one that's more complicated than it needs to be. So this is a partnership investing in several other entities and partnerships, so he has a various amount of partnership interests in different items. But typically what you'll see here is, if you're investing in a partnership with one asset, let's say you have 5% interest, all of this would just say if this is the first year, it'll say beginning zero, ending 5%, 5%, 5%. So that's what you would typically see. Uh, but this one because there's so much stuff going on it just says various.
Speaker 2:Okay, got it. That makes sense. Yeah, that wouldn't set off like a warning flag to the IRS, would it? Uh, if it says various like that, okay, got it Okay.
Speaker 1:Yeah, uh, some of the things that are interesting or to point out. Here you're going to see just some basic stuff the partnerships, the partnerships employer ID number that's just like an EIN or like the equivalent to a social security number of the entity, and that's in box A. Box B shows the partnerships name and address, shows the partnership's name and address. And then when we scroll a little further down to E and F, you see the name and address of the investor and they identify the entity structure of that investor. And let's look at this right here. So the capital count is zero at the beginning of the year because he didn't invest right away, but we can see that the capital contributed is $500,000. I mean, he invested $500,000 to create an $880,000 loss.
Speaker 2:Go ahead, keep going, keep going with what you're saying.
Speaker 1:Oh no. And then what you see here is actually we have a negative capital count because your capital account is reduced by your losses, Right?
Speaker 2:Now okay, that makes sense that goes back to the thing I mentioned earlier on is that some investors will say to us or have said to us well, if my capital account like if the capital account goes to zero, I'm getting all my money back. Essentially, I know this is a paper loss because we're just talking about depreciation, but the capital account going to zero, I'm no longer a partner in the deal. Like, how does that? How does that work? I've heard that be controversial, come up in conferences and other places and from other investors If my capital account goes to zero, I've gotten all my capital back. Therefore, now what does that look like going forward? And there's been some confusion around that.
Speaker 1:Yeah to the capital account isn't everything. So there's a lot of misperception here. When your your capital account is increased by the money that you put into the partnership, it's the stuff is the amount that you get in, but but your capital account is reduced by your losses. So here in this example, here we have $500,000, but we deduct this amount of $880,000. So what this eventually means is when you liquidate your partnership interest, essentially you got to be made whole or until you get to zero.
Speaker 1:But as far as how much you own in the partnership, it's not like you owe the partnership money here. It looks a little confusing, but when we think about this, there's a capital account and then there's inside basis which shows how much of this partnership do you actually own. And one of the things that the capital account doesn't show you here is that your basis is increased by your debt. So our share of non-recourse and qualified non-recourse financing is actually this amount, right here. Right, so you have X percentage. You put in half a million, but you're also borrowing money to acquire the real estate and your share of that stuff is increased by this amount. So overall your basis is increased by roughly $1.2 million and then it's reduced by this tax loss but overall you still have a positive amount here of interest in this partnership amount here of interest in this partnership Because it's like you're borrowing money to acquire this asset but you still have stuff in here that is just borrowed money.
Speaker 2:Right. And then when you're set up on the LLC itself, it's going to have an operating agreement. Obviously, if it's a private placement, you have a PPM and all that. The subscription agreement that talks about what you get as you invest. You get some units or ownership shares in the LLC itself and that doesn't change based upon your capital account. You've bought those units, you've bought those shares, so you're technically still in the deals. When they go to sell it later on or refinance it or whatever, you get your portion of those profits based upon what you invested into the deal and what the docs say that you signed off on. That helps investors understand okay, I'm still an owner in the deal. And what the docs say that you signed off on. So that helps investors understand oh, okay, I'm still an owner in the deal. Just my capital count is at zero, whatever, because I got depreciation like what you just talked about. But because you bought into that LLC, you are still an owner or partner in that LLC.
Speaker 1:Yeah, so don't get scared when you see oh, at first I thought I had a half a million. No, I only have a negative amount. What do I owe? The partnership money? I owe a negative amount of this partnership. What's going on? No, don't worry.
Speaker 1:This is very common to have a negative capital count in real estate when we see that our loss exceeds our contribution and that's going to be maybe not as common right now at a lower bonus percentage, but it was very common in the year of 2020. And then when you do refis and you get distributions, that also reduces your capital counts. So what I would say here is you're putting cash in and you're borrowing money and you have what's called your basis in the partnership, which is the collection of those items. So I wouldn't stress out too much about a negative capital account here. And when it comes to partnership basis, do we have enough basis to take our losses? Because we're borrowing so much money, we're always going to have enough basis to cover our losses. Even though we have a really nice loss here of $80,000, that's a lot less than the money we put in, which is a half a million, and then, as part of the partnership, we're taking share of that, roughly $1.2 million in debt. So we have a lot of ownership in this partnership between the amount we borrowed and put into it. Now, if you guys as listeners, if you feel overwhelmed, I understand the partnership.
Speaker 1:Taxation is very complex here. But some other things I want to point out here Now. Obviously you may see some ancillary items, like you may get a little interest income. There's maybe some ordinary income activities that flow through here. But when you have a loss of $880,000, let's say you don't have real estate professional tax status, what does that mean? Well, you're likely going to plug in this K-1 and it's not going to really do much for you on your taxes. It usually is going to be suspended, meaning you have a passive loss that's underutilized and it's carried forward. To be suspended meaning you have a passive loss that's underutilized and it's carried forward to when you can utilize it. And if you don't have real estate professional tax status, some of the ways you can use these losses is it'll offset a future capital gain event from your real estate. It'll offset positive cashflow profits from your real estate. So there's still value here. So as you start to drive profit, these losses carry forward and offset profit. So there's still some value here in the losses.
Speaker 2:Yeah, I was going to ask. So Dylan is. I'm looking at the chat real quick and he's asking can you show how the passive loss from a K-1 carries over into the future tax years? I mean, it's a great question right now because you're starting to answer that. So help me understand. If I make let's say I make $200,000, I have qualified real estate professional status, I made $200,000 doing you know whatever, my real estate duties or whatever it is, and then next year I make a hundred, and the next year I make a hundred, and that goes on for some period of time, are you saying that these losses, the minus 880,000, offsets the income I would pay on that 200 and then the 100 in subsequent years? Is that how that works?
Speaker 1:Kind of and this is a great question. So what you want to do here and this is really important, especially if you're transitioning accountants to make sure the data carries forward. But there's a form called 8582 on the 1040, where it shows you the collection of losses that you're taking and how much of it is used and how much of it is unused or suspended and carried forward. And so you have this reserve of losses. So let's say you make $200,000. In this example we have an $800,000 loss. Well, the loss will offset all of that $200,000 if you have rep status. But we have $600,000 of underutilized loss and the calculation of the underutilized loss and the carry forward is all going to be documented and tracked on that form 8582 of your 1040 tax return. Now, when you carry forward a real estate loss, even though it's non-passive and it can offset any type of income in the year you incur it, when you carry it forward it only will offset other passive income and other real estate capital gains, so it's not as valuable when you have to carry it forward.
Speaker 2:Okay, got it. So you're saying it wouldn't necessarily offset my income in the future years but it could offset other passive income? Correct, okay, got it. And then what if I have qualified professional real estate status? Does it offset that future income in future years? Potentially.
Speaker 1:Unfortunately, even when you have rep status, when it carries forward, it kind of reverts into just passive losses with its limited deductibility. When you carry it forward, okay, got it. Okay, that's a great question, by the way. Now this may be a timing opportunity for you guys as investors cost segs and maybe electing out a bonus depreciation and choose what properties to do the cost segs so that those losses are hitting your 1040 at the right time, because when you have suspended losses it's not the end of the world but that's not the best usage of your losses.
Speaker 1:In fact, I saw this guy who didn't want to hire us. He did like 15 cost segs on all his rentals. He's like, yeah, I get real estate professional status one of these days. Well, guess what? You didn't have real estate professional tax status on this return, so you paid all these fees and now we can't do future cost segs on these rentals and now you've missed out on this huge opportunity to use the laws as to offset your income. So timing and timing is really important and us as CPAs, we can think strategically as we do the returns, because a lot of times we don't have to decide If we're getting a K-1, we can't control that. But if you have schedule E's and you control the real estate, we can make those game time decisions based on the outcome of your 1040. We might say, hey, let's only do a cost seg on this property. Actually, let's get a cost seg on this property. Actually, let's get a cost seg on this one. I just realized he has more income coming from here. Let's trigger a cost seg from this property.
Speaker 2:Okay. So in other words, what if we bought a property let's say we put something under contract later this year and we close it in November or something and we can get, let's say, we close in October and we can get the cost seg done before the end of the year? You're saying it might be worth strategizing and getting that in January of 2026 so that we can then offset income in 2026. Is that the idea?
Speaker 1:So there's tons of flexibility here on your cost seg work. So you really just have to have that study done before you file it, and it doesn't really matter when the cost seg is done. So let's say, for example, it's 2025. And we realized that one of our clients had more income than we anticipated. There was an adjusting entry. Instead of making a half a million, they made a million. Well, we can say, hey, as we're doing this return, let's run the cost seg study on this additional property here. We can do that. We could have done that cost seg in 24. So you have tons of flexibility on. You just have to have that cost seg study performed to have something entered into the return.
Speaker 2:So-, oh, prior to your taxes are done. So in other words, okay, I gotcha, I gotcha Okay. So the actual years don't matter, it just matters when you're. Obviously you fly a return every year. But the point is is that if you are, if you've already filed your stuff for this year let's say you filed it magically, you filed it in March, like this month, somehow everything's done. You could then potentially do a cost x value for a deal in May or whatever this year and that will apply then to your taxes next year. So it's in other words, it's not that you get it done, it's just the filing years, it's in between those. So it's in other words, it's not that you get it done, it's just the filing years, it's in between that filing time period.
Speaker 1:Yeah, exactly. So as we're filing it, as long as we have that study to reference, whether that study was done now or last year, we can use that study as we do the return. So, as we do our 24 returns, even though the cost seg wasn't done yet, we can still do that cost seg as we're filing the return when we see it's appropriate. Okay.
Speaker 2:Got it All right. That's good strategy. That's good strategy.
Speaker 1:Now, on the other side, we may see a cost seg done on that property and we'll say, hey, this guy's already at a really low bracket and we know that his income is going to double in 25. Let's not do the cost seg, let's not apply the cost seg and let's wait until we do the 2025 tax return and enter the cost seg results.
Speaker 2:At that time we might say that Okay, so you could keep it in your back pocket.
Speaker 1:Essentially, yeah, and sometimes if we don't know what's going on with the client maybe or maybe not there's a capital gain event, there's like so much up in the air then we may even extend the return. So we have enough time to make that decision. Sometimes yeah but other times it may be a sure thing. We know enough about the client so we can make that decision right away. So there's a lot of opportunities to make these evaluations and analysis with the cost again, tons of flexibility and planning opportunities.
Speaker 2:Okay, that makes sense. Very good, I didn't want to interrupt what you were doing, but I thought it was a great opportunity to segue into Dylan's question there, so perfect.
Speaker 1:Oh, no, fantastic stuff. These are great questions. Now another thing you may want to note here is we see a federal loss of $880,000. Now most states are not going to conform to bonus. So even though you get this 880 loss, it likely will not be as good on the state level. And also this investment property may not be in the same state as the investor. So let's say this investment property is in Ohio and the investor lives in Kentucky. Based on the way the state laws come together, you're not going to be able to use an $880,000 loss against your Kentucky return. But also there's going to be an Ohio State tax return flowing through to you and it's going to show a lot less of a loss because Ohio is unlikely to give you that full amount of bonus. It may be only like a $200,000 loss and so it's not going to be as valuable on the state side. A lot of accounts in this stuff, by the way.
Speaker 2:Yeah, that's a good one. I never thought about that actually, to be honest with you, so should, as a, I guess, maybe LP, or even a GP, a sponsor. You kind of want to go where good markets are, so whether that's Kentucky, texas, whatever, because the deal is important, the market's important. But is that something that we should think about? Is you know the potential, like what state the property is located, the state, the states that we're hunting in, in other words, and how they treat taxes? Is that going to be an important factor for us?
Speaker 1:You know it's that's a hard. It's hard to answer. I'm going to lean towards while it may be worth considering, it's probably not important enough to. When you consider all the other variables you think when you're evaluating a property, the state tax considerations I don't think are going to be impactful enough here for you to make that decision. Because think about this If you invested in Tennessee or Texas and there's no state tax, well, you may say, hey, this is great, there's going to be no taxes due from Texas. But guess what? You live in North Carolina and North Carolina is going to see that you have business activity that is untaxed and they're likely going to tax you on that Texas activity.
Speaker 2:Got it.
Speaker 1:Okay, yeah, for all those nuances, it's probably not worth it, besides the fact that in the lower tax states you may incur greater property taxes to account for that. But one of the things that some people do is they'll get a pass-through entity tax selection where they get a tax credit. They'll pay the taxes at the partnership level and the credit can offset federal taxes in excess of $10,000.
Speaker 2:Okay, okay, got it. So taxes are not going to be a big consideration. We want to still do deals in good markets, so that makes sense, okay, good.
Speaker 1:Yeah, so we see a lot of folks who have lots of syndicated deals like this. They pay no taxes because the federal tax incentives are so good, but the state taxes oftentimes are unavoidable. But luckily, states tax you on a lower bracket. So we got another return here. And look at the year this is in 2023. So not as favorable here. Right, look at the capital contribution this is the first year $250,000. And we get a loss of 150. Same investment deal, so it shows up as net. Actually, this one, it must be a different one, but it shows a loss of 150. So obviously, when you invest in these syndicated deals, you're almost always going to see a cost like done in year one. Now the loss isn't as good as it was prior, but still it's a nice tax loss.
Speaker 2:Yeah, better than if it wouldn't have been. Yeah, better.
Speaker 1:Yeah, now because the loss is not as high. You have a positive capital count. Now, at the end of the day, this is not going to really impact your taxes at all. Just the way how things play out with partnership returns, it's highly unlikely that the capital count and partnership basis is really going to impact you so much because of just the way you gain basis from the non-recourse debt. Now I was running some numbers.
Speaker 1:Actually I want to backtrack here. So imagine you invested in this client at a 37% tax bracket, invest $500,000, gets an $880,000 loss. Loss that's $325,000 of savings. So paying $500,000, saving $325,000, that's like $175,000 out of pocket to invest in this vehicle net of taxes, and you have a half a million dollar investment. That's going to create some nice gains here. A lot of times you'll see other income, maybe interest income or maybe some other, just like some weird nuances or differences between book to tax, and usually these are immaterial and you can kind of ignore them. Interest income could be. Maybe you're holding some funds and you're collecting bank interest usually very minimal. I mean, the key items you're going to look at here is the net rental income here, and eventually we'll talk about what these cap gains look like.
Speaker 2:Yeah, that's what I'm seeing on mine. I'm looking at mine at the same time just for this one particular deal and it's kind of minimal stuff. I do have a few more line items in number 20, the obviously A, z and N, but I have a couple other things but I don't want to get too nuanced. But yeah, like you're right, it's smaller things that aren't going to be super meaningful.
Speaker 1:Yeah, and what you can do here is, if you're curious, if it's a material amount, if it's an amount you care about, you simply can control F the number and you'll see a notes page below that and it'll show you what that means here. Now, some of the things here that you're not going to see is let's pretend this is a year to return, this net rental income amount may be a positive amount or a smaller amount of losses, smaller amount of losses. And then, if you were to look at it on the state side because states don't give you bonus you're still going to see the advance of cost tax because you're going to get to write off the property over five and 15 years instead of 27.5 or 39 years. So you're going to see, it's funny because in the first year you're not going to have as much losses on the state side, but you're going to have more losses in the next five years on the state side because they're spreading out the impact of that cost over a greater amount of time because they don't get that bonus depreciation. So this is the final one that I want to share with you guys.
Speaker 1:The final one that I want to share with you guys, and this is. I'm going to tell you the story behind this as well, and some cautionary tales. So this is on the exit of some of the real estate here. So net rental income is negative 1.8. And oftentimes you'll see negative income statements throughout the entire time. You're looking to profit and be profitable, but a lot of times you're not going to really see that profit on the income statement. A lot of times the profit on these syndicated deals shows up in the exit. So there's some interesting things here. Look at the. If you go to lines 9C you see unrecaptured $1,250 gain of $600,000. That's a lot.
Speaker 2:What does that mean? What?
Speaker 1:does that mean? The unrecaptured 1250 gain here is, if we have the regular, if we do a cost seg here and we do, and we have the when we sell it, we have to recapture all of that depreciation and it's classified as unrecaptured section 1250 gain.
Speaker 2:Got it. So that's depreciation recapture right there.
Speaker 1:Yeah.
Speaker 1:Okay, and then we have section 1231 gain. Section 1231 gain is just the regular capital gain here. So this is going to be taxed at your favorable long-term cap gains bracket. This is going to be taxed at either 15% or 20%, and this is going to be taxed more. Actually, let me backtrack a little bit here. So there's two types of taxes here. Yeah, go ahead. The unrecaptured is actually this is the recapture of your ordinary straight line depreciation here, and it's taxed at a maximum of 25%. It's taxed at your marginal rate and it's capped at 25%. Now you also are going to see if you have recapture from a cost seg that's going to show up as just your rental income or your ordinary income here, or it should, and that's taxed at your marginal rate with no cap, and that could be really painful, hmm, okay, so this can be really painful.
Speaker 2:Okay, so this person they sold, they invested in whatever and they sold it this year. That's the story on this one. At the time of sale, they had the depreciation recapture and then the capital gain. They sold it at a profit. Yes, okay, got it and obviously there's a lot of taxation here, right?
Speaker 1:So you have, they sold that at a profit. Yes, okay, got it Now. And obviously there's a lot of taxation here, right. So you have $606,000 tax at 25% because this guy's in a high income bracket. So it was your marginal rate capped at 25% was still a decent amount of tax. And then you have this amount which, for him, is taxed at 20%. So we're talking about six figures of tax liabilities here.
Speaker 1:And what's interesting here is look at the distribution amount it's only $350,000. Right, and the reason why is on the exit of this property. It's not like, even though we have all this profit, think about it. Well, some of that profit is like a phantom tax because you wrote it off, the depreciation, and now you're paying it back, right. And then also you've done a cash out refi. So it's like when they refinance a property and give you some of your equity, they're giving you some of your profit in advance. So this client he got $350,000 in a distribution but he's paying taxes on, in this example here, $1.35 million of taxable income here. And he's like, hey, I took all my distributions and I put into more real estate and did cost segs on it. How come I'm paying taxes? I'm like dude. Look at this. Well, you already took earlier distributions in prior years and now you got to pay the recapture tax on this investment.
Speaker 2:Could they do a 1031 in this case?
Speaker 1:So you could, but it would be very hard because when you have partnership income, the partnership would have to 1031 its interest into more real estate or the partnership has to do it at the partnership level, not the individual investor level.
Speaker 2:So when you get level, not the individual investor level. So when you get a distribution as an individual investor or, I'm sorry, distribution or when the property sells and they distribute those funds out to all of the let's say, there's 10 investors in the deal they invest, they give each one their share of the profits, at that point it's it's. It's tough, it should have been done at the partnership level with all 10 investors. It's tough. It should have been done at the partnership level with all 10 investors, 1031.
Speaker 1:We often find that they want to exit. While it would be fantastic if that could work, a lot of times they want their cash back. They really just want to invest in these single deal type of partnerships. It's rare that you see them actually do the 1031s at a partnership level here, but it's possible or you could do. They call it a drop and swap, where essentially you take the property out of the partnership, distribute each person's share of the partnership and you can all each go your own way and decide if you want 1031, your shares of that real estate instead of the partnership interest.
Speaker 2:Interesting. Okay, I got you All right, that's interesting.
Speaker 1:There's something interesting here as well. Here there's something called section 1245, depreciation recapture. That's when you do a cost seg and you do accelerated depreciation, you know the personal property write-offs. You know for, let's say, you know the furniture, the cabinetry, and also if you write off and you get bonus depreciation on the driveway, it's taxed at the ordinary income brackets and it usually will show up as real estate income because it's going to flow through onto your 1040 as ordinary real estate income. We really only see the capital gains amounts taxed at what we call 1250, which is capped at 25% and 1231. So one thing I'm thinking may have happened here is they did some negotiation on the values of what they were selling to get out of that recapture. So there's probably some swift moves done by the organizers here to avoid that really painful 1245 recapture which is taxed at your federal marginal rate with no cap.
Speaker 2:Interesting. Okay, I have a question and I do want to acknowledge that we have Dylan and SK in the chat. They do have a couple of questions. We'll get to that here in a second, but before I forget mine, what happens when we've looked at deals before where we're trying to buy the business or separate the two, where you have some sort of goodwill because of the name? Let's say we're looking at a storage deal and it's managed by you know, aaa storage company, whatever, and they've built up over time. The owners owned it for 10 years. They have built up some goodwill in the community because people know that's the name of the storage facility down the road.
Speaker 2:So we will sometimes go in and obviously it's different based upon each jurisdiction and we've talked to attorneys about this where we try to buy the LLC and separate that in essence from the actual real estate property to save on taxes on the back end. Does that property taxes? Does that help with this in partnerships at all? Have you seen? You know what I'm talking about. Have you seen that at all? Does that help when you reduce your basis by doing it that way versus just straight up buying? You know, let's say it's a $10 million property and you just buy it for $10 million. You know, does that make sense.
Speaker 2:Yeah, go ahead.
Speaker 1:This is what I would think here is that when you assess property taxes, it's not based on the purchase price, it's based on the assessed price by the local county assessors. So whether you bought it for $5 million or $7 million, I'm not really sure that's going to influence the tax assessment provided by the county. So that's one thing I would think about. And also, if you have goodwill as part of your purchase, goodwill you can write off a little bit up front, but it's amortized over 15 years, which is not bad. You can write off a little bit up front, but it's amortized over 15 years, which is not bad. But if you could assign more of the purchase price to the asset and do a cost seg, you're going to get potentially a little more bonus depreciation up front.
Speaker 2:I see what you're saying. Okay, that makes sense. Yeah, that makes sense Because I know some people we've looked at doing it before. You purchase the LLC separate and you can save on the property taxes because the assessed value is based upon that purchase price, which saves you a little bit. But you can't sneak and do, you can't get away with stuff. We're not trying to do anything nefarious, but they're going to understand like, hey, you paid only $5 million to this business. How does that make any sense? You're trying to allocate too much goodwill and that will always get caught by the IRS. So okay, yeah, Cause it goes on the closing statement. So that that makes sense. Okay, I don't want to forget here Dylan's question. He says is it rare for an LP to check box 22 or 23?
Speaker 1:Let's look at, because I don't remember those numbers. Let's take a look here at 22. Oh, okay, More than one activity for at-risk purposes. More than one activity for passive activity purposes. I don't think that a lot of people are going to pay attention to that. There's not really much tax impact here, so I don't think that is common for people to check those boxes. Also for the purposes of you entering your K-1, this isn't really going to do anything. Here. You're really looking at the income amounts flowing to your 1040 and you're tracking your basis and making sure you have enough basis here and as far as when it comes to at-risk purposes, you're going to have enough. That's really saying that you have enough, that you're putting yourself on the line per se to give you the ability to take these losses, Because there's some protection you get when you invest in an LLC, where the LLC is liable for a lot.
Speaker 2:The LLC is liable for a lot, but for the people listening, because you have what's called qualified non-recourse debt that gives you enough at-risk basis to use your losses. So these items aren have a simple question regarding filing the state tax which state does one have to file a state returns? For example, if an LP investor is investing in California? Sorry, if an LP investor is living in California, invests in a property in Kentucky and the property is managed by an entity registered in North Carolina, where does he or she need to file the state taxes?
Speaker 1:Yeah, that's a great question. So what's going to happen is you're going to get a K-1 that shows your share of Kentucky income, because the property is in Kentucky and you're going to plug that in. It's likely going to show a loss unless you have an exit and so you're going to do a Kentucky tax return. Now, if you have profit in Kentucky, california may look at that and may want to make you pay some more in taxes on that Kentucky activity potentially. Now, if it's managed by a company in North Carolina, if you own a piece of that because sometimes you have GP interest in the property management company If you own some of that property management company, you may also have to have some North Carolina income to report on your return. However, if you're not managing it it's a third party that manages it you have no activity in North Carolina. There are no tax implications on the North Carolina side.
Speaker 2:That makes sense yeah, good question.
Speaker 1:Yeah. Now here's another thing. Look at this. We have all this taxable income here. We have 1.35 million in tax taxable income here. Make sure your CPA doesn't mess this up and put 1.3 million of taxable income on your state returns, because a lot of this is the recapture and, as we know, the states don't give you as much depreciation, so you don't have as much of a loss in the year you purchase the property and you don't have as much of a gain because you're not recapturing as much of a loss on the exit. So make sure they scroll down to the state tax return and you're not paying as much income tax on the state side.
Speaker 2:Yeah, that would not be good.
Speaker 1:Not good at all. Now here's some other things to think about, some planning opportunities. Well, the client's accountant messed up because when you have real estate professional tax status, you don't have to pay net investment income tax. That's a 3.8% tax and tax software assumes you're going to pay it, even if you have rep status on your return. So you have to manually remove that net investment income tax. In this example that we saved them like forty thousand dollars in taxes just by making that one adjustment, just by understanding the tax law wow, I didn't know that.
Speaker 2:That's great, yeah, that's excellent you talk about qualified rep status in other videos. I think you mentioned that earlier on, right? Yeah, Okay, Got it. I wasn't sure if folks here were familiar with that or whatever. But a real estate professional status. You don't have to be licensed like have a real estate license to have that status, Do you?
Speaker 1:Not at all. That's a great question as well, because a lot of people say, hey, does getting a real estate license or becoming a licensed real estate agent help me get my real estate professional tax status? And the answer is not at all. All that we need to say is that you put in 50% of your overall working hours and that totals to at least 750 hours in your real estate trader business to have real estate professional tax status. So you could be a part-time investor, flipper, wholesaler, general contractor. It doesn't matter licensed or not, as long as it's more about what you're doing in your activities.
Speaker 2:Got it Okay, perfect, yeah, perfect.
Speaker 1:Now some of the things that we could have done here with this guy.
Speaker 1:So we have all this income coming in here from the partnership.
Speaker 1:What we could have done here is we could have done a cost seg on another rental property to offset the capital gain on this one. Some other things we could have done in this example here is we have some advanced charitable strategies where, after we've exhausted all of our real estate strategies and being only has $350,000 to invest into more real estate, we still have a lot of taxable income. So we do have some more sophisticated structures that give us career deductions, where we can create charitable structures or even purchase assets and rent them out even rent out solar assets as well. So there's so many ways where, if you're in a really high bracket like this and after we've exhausted our foundational cost segregation studies and capital gains planning, then we do what we call we open up the vault to the more advanced tax planning where we can do some more holistic look at all your income streams and potentially still get to bring this guy down to a $0 tax bracket if we had enough time to work with the guy.
Speaker 2:That's fantastic, man yeah.
Speaker 1:Yeah, so it's all about being proactive. We love real estate and real estate tax planning but sometimes you have really good profits or, let's say, you can't find a good deal in time or not enough of a good dealer and you're in like 37% tax bracket. That's when we start looking on things that we can stack on top of the real estate tax planning ideas and it all kind of comes together and overall we create more tax savings that can be redeployed back into more real estate where we do more cost segs.
Speaker 2:So this guy back to the 1031 thing. Obviously there's other ways to reduce your taxes, like you're talking about just now, but the 1031, it'd be very like you said. It'd be very difficult for him to do that at this point. What if he had another property already identified? Maybe it's a single family home or something like that? But he had something identified that he wanted to go ahead and purchase with the proceeds from this partnership. Could he theoretically do that, or would it just be almost impossible to offset the taxes here?
Speaker 1:So you have to identify your replacement property within 45 days and the 1031 has to be established before the sale of the property. So if the sale has already occurred, it's too late. And then, upon the sale being closed, you have 45 days to identify a property and then you have another 180 days to close. So you have a small window here. So if the sale has already been done, it's too late. And a lot of times when you invest passively in partnerships, you're just not going to have enough flexibility to do this because the partnership is controlling the asset.
Speaker 1:So some other things that we could have done here is we could have also put money into a qualified opportunity zone fund and you're not under as strict a time clock. You really just got to put the money into a qualified opportunity zone fund within 180 days. Then you have 30 months to deploy it into a qualified opportunity zone investment and now you've deferred the capital gains for a little bit here and the QOZs give you really favorable exits if you weren't to do that. So when we're trying to one of the things I think about here if we've already incurred a gain and we can't do retroactive, we can't do proactive tax planning the only things we can do after the fact and after the year is closed is we can do more cost segs, qualified opportunity zone funds and we could potentially get some credits if we want to do some solar tax strategies, which is an option for some of our clients as well.
Speaker 2:What about Dylan's asking here just learned about he's saying just learned about the deferred sales trust strategy, the DST. I guess that's a lot more flexible than a 1031. Do you have any experience working with DSTs?
Speaker 1:Yeah, I'm actually meeting with someone today to talk through those things and they are. They do give you a lot more flexibility here in that you can invest in across a collection of assets. But the challenge on this particular scenario is, because you have partnership interest, the whole partnership would have to 1031 into the DST or they would have to do the drop and swap, which is cumbersome, where they take all the real estate out of the partnership and give you each your share. So you can tend 31 out through a DST. But yes, those would be easier to execute.
Speaker 2:Interesting, okay. So then, guys and gals who invested in syndications, for example, you have a lot of folks who follow people online or whatever and they invest in one syndication that's doing storage, and then that deal goes well and they cash out, they get their capital back. They're kind of in a place where they got to, like you said, use some of the strategies or whatever, but they may end up having a tax bill based upon whatever the profits were from the sale of the property. Is that kind of like you got to kind of plan ahead for that, or like how does that work?
Speaker 1:Yeah. So what I would say here is you want to be proactive and understand the tax implications of the income hitting your 1040 as best you can. And when you get these massive distributions that are untaxed, right, like this guy probably had like a half a million dollar or more distribution in a prior year that wasn't even taxed, but what he did was he put it back into his business. He didn't really think much of it. So when you get those cash out refis, you can redeploy it and you can build up a reserve of unutilized losses that will eventually offset that future gain. And a lot of these folks have other sources of income, like this guy. So had he continued to reinvest into more and more real estate, where they're doing more and more cost segs, you could build up this reserve of losses or suspended losses that will eventually roll forward and offset the gain. And let's say you use all those losses. Well then we do some more holistic tax planning where, if the gains are unavoidable, then we incorporate some other strategies on top of the real estate.
Speaker 2:Okay, that makes a ton of sense. So, yeah, you have to be, even though you're an LP, technically passive in a deal, you still got to be aware of what's happening with the deals themselves and planning ahead with your tax person to offset some of those gains hopeful gains in the future. That's what I'm hearing you're saying, right?
Speaker 1:Yeah, ideally. Now, sometimes when you have a lot of k1s, it becomes nearly impossible to know what's going to happen. But a lot of times when you have a lot of k1s, you've built up so many losses that even if a couple of these these properties will exit, what we see is they have so much activity going on. They have enough losses to offset those cap gain events because of the collection of losses that they're gathering from all these other investments.
Speaker 2:Okay, got it. That makes sense, okay, perfect.
Speaker 1:Yeah, but if we have a handful of K-1s, we can be a little more proactive on timing the exits. Usually you guys will communicate hey, we have a gain event, this is what it may look like for you. And then you can strategize with your CPA and realize hey, I have a 500,000 expected gain. Well, how much are my suspended losses? What does this mean for me? Do I have suspended losses? How much is taxable? What do I do with the cash right now to prevent future taxation?
Speaker 2:Man, there's a lot to think about. It's like we read Rich Dad, poor Dad. We're like, yeah, I want to go invest in real estate and start businesses and stuff. And then you realize more money, more problems. Sometimes you got to think through I'd rather have the problems, but you got to think through and how to solve those things into the future. You know it's a, it's a it comes with with some extra responsibility. I think.
Speaker 1:Oh yeah, well, I say more money, more problems, no money, most problems.
Speaker 2:Right, yeah, yeah, that's a really good way of putting it. Yeah, absolutely, which problems do you want to have? I certainly don't want to have the latter. So that's really good man. Yeah, that's what we get. I mean, yeah, go ahead, sorry. That's really good man. Yeah, that's what we get. I mean, yeah, go ahead, sorry.
Speaker 1:Oh, I was just saying so at a certain point here and it's great to have a foundational understanding, but at a certain point here, when we're looking at seven figures of gains, you can justify investing into a higher end service such as ours or someone else who really understands this stuff. Like I said earlier, prior account misunderstood net investment income tax that costs the client $40,000. So at a certain point it's good to have a foundational understanding and know how and when to communicate, but after a certain point you can only learn so much from our conversations and podcasts. You got to just leverage a professional who can look at your stuff.
Speaker 2:Yeah, 100%. It's worth that extra knowledge and income. I think, like in storage for example, people will try to use other folks as consultants who don't know as much about the industry, and it becomes pretty difficult because they don't know. You know, you might save a couple of bucks. Like an attorney, for example, that only does residential closings, they try to do a storage or commercial real estate closing. It's a completely different not completely, but it's different and so you can run into some issues there. So it's worth hiring a professional such as yourself to help. There's a tipping point where it makes sense to hire a professional to help who's experienced with this kind of stuff. It can save you some money. I mean, if you save $40,000, that obviously offsets the cost right there. To me that makes sense.
Speaker 1:Easy, yeah, cost right there. To me that makes sense, easy, yeah. We got another question here. How does the estimated taxes from pending K-1s? When you get your K-1 April 15th and you file for extensions, I am penalized by the IRS if I underpay, or, and if I overpay, I'm giving the IRS my money without interest. That's a good point here. Now here's a way I would look at. This is to avoid penalties. Yes, there's interest and it's going to be nearly impossible if you don't know what's going to show up on that K1. But make sure you're paying at least 100% of what you did in the prior year, because then at least you avoid the penalty portion, and now you're just paying interest. So the interest is you do wind up maybe paying interest. However, you have the money longer. So, yeah, it's not the best situation to pay more than you want, but at least you can avoid the penalties. By making sure you paid as much in taxes as you did in the prior year, you get a safe harbor against penalties for underpayment.
Speaker 2:Yeah, 100%, man. That's a good way of putting it. I never thought about it that way.
Speaker 1:And also maybe consider having your accountant try to abate some of those penalties, Because you'd be surprised by the flexibility Now. You can't get out of the interest payments unless you're in big trouble, and then you try to do some sort of remediation and that's a whole other conversation.
Speaker 2:Cool, a hundred percent yeah.
Speaker 1:Well, you know. I think I think we've gone through some you know some really deep stuff on this one. I'm really glad that you came with some questions and on the audience as well Like this is stuff that that can really help out a lot of people.
Speaker 2:Absolutely, man. Uh, you answered some questions for me, helped me understand things a little bit better. I had some uh revelations I guess you'd say you know about how some of this stuff works, Cause, again, it's not my wheelhouse, Um, I get the forms and we send those out to folks, but it's um, it's not my wheelhouse exactly. So it's super helpful for me to understand and then, obviously, for you guys to help answer any questions you guys have and kind of moderate a little bit and go from there. So I had a great time, man, Appreciate it.
Speaker 1:Yeah, dude, yeah, I always happy to have these conversations and I felt like you know the recording of this will be helpful to to send to some of our folks who get these K ones and and no, they just send them off. So now we can start doing some things, yeah exactly.
Speaker 1:Yeah, so so you know. And, of course, if anybody listening wants to learn more about what we do or gain more insight, go to a tax planning checklistcom. We have a free mini course right now, well, and it'll allow you to walk through a step-by-step process over a few days just to assess if you're missing out on any tax planning opportunities. It's just a free little mini course. You get a checklist to walk through. It should be helpful in also capturing some foundational tax deductions. And, of course, if you want to apply for services, you go to prosperalcpacom. Chris, what about you? Can you give us in the audience a call to action? And where people can learn and subscribe more?
Speaker 2:about your stuff. Absolutely, they can visit storageinvestorshowcom. Storageinvestorshowcom. I have all the information there newsletter, podcast information et cetera, if you ever want to connect again. Again, you guys are in the Charlotte area. I'm looking for deals in this area. I know I think it was maybe Dylan or somebody mentioned earlier on. Yeah, dylan said that the FlexSpace units that we were talking about, flexspace Industrial that we were talking about you've seen that pop up all over Anchorage, alaska. I'm sure you guys have seen it where you guys might live. But yeah, they've become very popular. That's what we're looking for right now.
Speaker 1:That and self-storage as well. So happy to you know answer any questions you might. You guys might have and go from there. Yeah, and also you know, by the way, I met, I saw and met Chris briefly like six years ago, before I even started. That's right. Yeah, we were hanging out at this meet. At the first it was called like tough decisions in real estate.
Speaker 1:This guy, dan Hanford, and I remember yeah, I remember you, like all of us were like doing next to nothing, like I was like renting out, like my like a room in my apartment or something and you were doing stuff. Like I remember you caught the attention of Dan Hanford because you're like, oh yeah, this, this and this going on self-serve. Like I remember you caught the attention of Dan Hanford because you're like oh yeah, this, this and this going on self-serve. Like, oh damn, this guy means business right here. He's doing all these big things. All of us are like trying to close our first single family rental.
Speaker 2:Those. Those are funny times, man, it was. I remember that it was a good time with Dan and the group. We're at Topgolf, I think, and a few other meetups as well. So yeah, then we we bumped into each other at the Jeremiah Boucher real estate conference back in, I think, october or something like that. I think it was out in California. So it was great reconnecting man. I appreciate that and yeah, it's been. It's been a wild ride the last couple of years.
Speaker 1:Yeah, since then we've all gone on to bigger things and really exciting stuff.
Speaker 2:And hey, man, you know what. That's good, though, because, like that meme that shows like how we think it's going to go, like, pat, like point A to point B and it's like a straight line and it never is. That's like and it's actually the Willie the really, the way it really goes is like the squiggly lines that go all over the place, but you end up getting where you want to be, right. So, uh, I think that's kind of where we all were. I know there's some folks in that group that we met. They were doing stuff with Airbnbs and they don't do that anymore. You know, they've gone on to other places and other things and have grown, but ultimately they wanted to be business owners and own real estate and all that and, uh, they're working towards and have achieved those goals. So that's, that's what matters in the long run. You know, it's okay to pivot and make some changes and kind of find out what you really want to do and go from there.
Speaker 1:Yeah, that's all part of the journey. I never thought I'd have employees and now I got like 12, 13 of them.
Speaker 2:That's amazing, man. Yeah, you have to grow as a person too, like you know to, to be able to handle that stuff, and I think it's it's pretty cool.
Speaker 1:Oh yeah, I mean, and then you know, and then you, when you hire good people, you're challenged to keep teaching them and keeping them engaged and learning. Yes, it's all part of the journey and it's been exciting. So, uh, you know, chris. Again, thank you so much for your time and sharing your experiences.
Speaker 1:And you know yeah, yeah, we'll put a link in the show notes for for your stuff and let's keep in touch anytime I can help or we can connect. Uh, anytime I can help or we can connect, I'd love to keep in touch.
Speaker 2:Absolutely, we'll do, mark. Thank you guys. Thank you guys so much for having me on. I appreciate being part of it.
Speaker 1:Absolutely have a great day.
Speaker 2:All right.
Speaker 1:Take care. Thank you, thank you.